Unit 1: Financial services overview

Financial services are activities, benefits and satisfactions connected with the sale of money that offer users and customers a financial benefit — services provided by banks, NBFCs, insurers, mutual funds, brokers and other intermediaries.

• Features: intangible, customer-oriented, inseparable (produced and consumed together), perishable, dynamic, people-intensive, regulated, information-based.
• Importance: mobilise savings, allocate funds to productive uses, spread and transfer risk, promote investment and growth, specialisation, financial inclusion, efficient payments.

• Reforms: Narasimham Committees (prudential norms, deregulated rates, private banks), Basel III capital, IBC and SARFAESI for recovery, bank mergers (2017–2020), recapitalisation, PCA framework, digital payments (UPI), account aggregators.
• Future challenges: asset quality cycles, competition from fintechs and big tech, cyber security, maintaining CASA deposits, climate risk, credit to MSMEs, governance of PSBs, talent and technology upgrades, financial inclusion quality.

• Structure: sponsor → trust (trustees) → AMC (manages funds) → custodian, registrar and transfer agent; regulated by SEBI; AMFI is the industry body.
• Pension funds: NPS regulated by PFRDA — Tier I (retirement, restrictions on withdrawal) and Tier II (voluntary); pension fund managers (SBI, LIC, HDFC, ICICI, UTI, Kotak, Aditya Birla, Tata, Axis, DSP); choice of asset allocation (active or auto choice — LC75/50/25); EPFO manages EPF and EPS; Unified Pension Scheme (2025) for central government employees.

• Insurance services: life, health and general insurance (risk transfer and long-term savings) — regulated by IRDAI.
• Bancassurance: banks distribute insurance products as corporate agents (or brokers) — uses bank's branch network and customer base; benefits — fee income for banks, wider reach for insurers, convenience for customers; risks — mis-selling, forced bundling with loans (RBI and IRDAI caution against it).
• Reinsurance: insurers cede part of risks to reinsurers (GIC Re, foreign reinsurance branches) — facultative and treaty; protects solvency and enables large risks.

• Regulation: SEBI (Alternative Investment Funds) Regulations, 2012 — Category I (VC, angel, SME, social impact), Category II (PE, debt funds), Category III (hedge funds, complex trading).

• E-banking: internet and mobile banking, UPI, NEFT/RTGS/IMPS, ATMs, POS, digital lending — 24×7 service, lower costs, inclusion; risks — fraud and cyber attacks.
• Securitisation: pooling loans and selling them to an SPV that issues pass-through certificates (RBI Master Direction 2021).
• Asset reconstruction companies (ARCs): registered with RBI under SARFAESI Act, 2002; buy NPAs from banks (cash + security receipts), resolve through restructuring, takeover of management, sale of assets; NARCL (2021) for large NPAs with IDRCL for resolution; government guarantee on security receipts.

A depository holds securities in electronic (dematerialised) form and facilitates their transfer by book entry — Depositories Act, 1996.

• Benefits: no risk of theft, forgery or loss; no stamp duty on transfer of demat shares; faster settlement (T+1); easy pledging; automatic credit of bonus and splits; nomination.
• Dematerialisation: converting physical certificates into electronic holdings; rematerialisation is the reverse.
• SEBI's role: regulates depositories and DPs (SEBI (Depositories and Participants) Regulations, 2018), mutual funds, AIFs, merchant bankers, brokers, CRAs; protects investors; develops markets (T+1, UPI-based ASBA, investor charters); enforcement against fraud and insider trading.